The Rapid Rise of Startup Accelerators
Accelerator programs have become a core step for many successful startup journeys, and they will continue to play a pivotal role for many to come.
- As of July 2021, over 19,800 investments in startups have been made by accelerator programs in the US — over double the number of investments made between 2005 and 2015 combined
- Startup accelerator programs allow participating startups to grow significantly faster than startups who do not pursue an accelerator program
- 2021 startup accelerator investment volume was significantly up from previous years’ activity
In 2005, a company with a revolutionary idea was born in the heart of Cambridge, Massachusetts. No, we are not talking about Facebook. We are talking about Y Combinator. Y Combinator was founded on the simple idea of investing in startups while simultaneously providing them with mentorship and venture capital exposure. This seemingly simple idea for a company — to give guidance and connections to the companies you invest in — is what we now know to be a startup accelerator. Since their founding, Y Combinator has gone on to help launch companies like Airbnb, Doordash, Coinbase, Reddit, and Instacart. The accelerator program’s ability to generate success has led startup accelerators to become an increasingly popular way for new startups to grow their business and fundraise. Since 2005, other notable startup accelerators, like Techstars, AngelPad, and Founder Friendly Labs, have made their way into the market, along with 3,000 other startup accelerators around the world. Our own company, Resultid, has had its own startup accelerator experience, completing Techstars and Pax Momentum acceleration programs in 2020. Given startup accelerators’ historically impressive ability to generate success for startups, they are becoming one of the hotter markets for investment, and inspiring innovation across all fields of technology.
Structures and Incentives of Accelerators
Startup accelerators typically operate according to the same few criteria; they exist as fixed term, cohort based, and mentorship driven programs that typically conclude with startups exiting via a “graduation”. This graduation often comes in the form of a Demo Day, where startups pitch their business to investors. These criteria differentiate startup accelerators from business incubators, which are generally run by private companies or municipal institutions such as colleges and universities. Such incubators usually take years to develop their startups and require more equity than an accelerator program might require. The largest startup accelerators usually have rigorous application processes that result in only 1% to 3% of startup applicants being accepted. Once accepted, accelerators typically offer seed money to the startups in exchange for equity, usually ranging from $10,000 to over $120,000. The startups are then generally thrown into a 3 to 6 month program where they receive mentorship and access to exclusive networks, which they eventually use to secure additional funding from large investors at the end of their Demo Day presentation. This process has stood the test of time and has lifted countless startups off of the ground.
Given data on over 2000 ventures from 43 accelerator programs, Harvard University has found that accelerator programs allow startups to grow significantly faster than startups who do not pursue an accelerator program. In 2019, startups that “graduated” from accelerator programs received an average of $414k in funding and generated an average of $100k in 2020 revenue. Accelerator programs in 2020 were primarily “agnostic”, too, meaning that they took a more generalist approach by accepting companies from all industries. In fact, 57% of programs take this approach. GAN, a popular accelerator program in the United States, still claims, however, that “financial services (FinTech), SaaS, data and analytics, health care, and AI are the most highly sought-after verticals.”
The Accelerator Boom
As of July 2021, over 19,800 investments in startups have been made by accelerator programs in the US. Y Combinator, Techstars, 500 Startups, and MassChallenge stand at the top of this list. (Full disclosure: Resultid is a Techstars portfolio company and a proud alum of the Boston 2020 class 😌.) There is a clear trend of accelerator programs increasing their volume of deals and also becoming more generous in their equity askings. In the ten years between 2005 and 2015, there were just over 8,000 investments made by startup accelerator programs in the US. The first half of 2021 showed double that volume. Accelerator investment values have increased as well, and dramatically so in recent years, from an average of $38k investments for 7% stakes in 2019, for $53,000 for 6% stakes in 2021, to a 2022 announcement from Y Combinator that they will now be investing $500,000 into their accelerator participants. Duration of accelerators is also increasing, from an average 16 weeks in 2019 to 19 weeks in 2021. Increases in investment volume help both accelerator programs and startups, increasing revenue for accelerators and creating better equity deals (lower stake and more capital) for startups. It is through this fact that accelerators and startups are inherently incentivized to engage with each other, creating vast growth opportunities for both parties well into the future.
Accelerator programs in 2021 found more traction with a few new implementations. Digital participation, post hoc support, and corporate partnerships increased the surface area for potential profits in the world of accelerators. Before the beginning of the COVID-19 pandemic, 100% of accelerator programs had some sort of in-person component, but by the end of 2020, only 33% of accelerators were doing anything in person. This not only allowed accelerators to increase the volume of participants in their programs, but also allowed startups to more easily participate in accelerator programs. New digital frontiers are driving the growth of the startup accelerator ecosystem.
Accelerators have also begun to add post hoc programs that allow participating startups to be assisted in potential scaling efforts, further increasing success for startups and their investing accelerators alike. Another particularly successful new trend in accelerators are corporate partnerships, which increase the financial health of accelerators and give interested corporations exclusive access to innovative startups.. Notable examples of this include groups like H-Farm and gener8tor, whose structures have matched countless corporations with up and coming startups, generating new sources of revenue for all parties involved. It is mutually beneficial partnerships and new forms of support that have laid the foundation for startup accelerators to become even more commercially viable and structurally sound into the next decade.
Path To Success
The growth of accelerator programs is driving all sorts of innovation in a multitude of industries. As previously mentioned, accelerators are a significant reason we have innovative companies like Airbnb, Doordash, Reddit, and Coinbase. Accelerators supply capital, knowledge, and networks that rocket launch powerful, yet unfunded ideas. As of November 2021, the value of the top 30 Y Combinator companies was $575 billion. 160 of Y Combinator’s companies have a valuation over $150 million. Y Combinator is also estimated to have created over 70,000 individual jobs. Ian Hathaway, research director of the Center for American Entrepreneurship and a senior fellow at the Brookings Institution, notes that “accelerators seem to be a positive addition to startup ecosystems across the country and the world.” Hathaway has also iterated that “accelerators have a positive impact on regional entrepreneurial ecosystems, particularly with regard to the financing environment.” Accelerators expedite innovation processes and open channels wide open for new “unicorns” to come out of the startup pool.
Startup accelerator programs are a 21st century concept that have seen significant growth, popularity, and influence within the startup ecosystem. They provide valuable mentorship and fundraising opportunities — connections and guidance that many would not otherwise have access to. Accelerator powerhouses like Y Combinator and Techstars continue to make massive waves in startup culture, and, along with myriad new accelerators around the globe, will continue to inspire innovation well into the future. Accelerator programs’ ability to form symbiotic relationships with startups has created a new era of startup financing and amplification of new & innovative ideas.
Update June, 2022
As of today we are standing at what appears to be the precipice of a recession and subsequently a difficult path forward for both startups and large corporations alike. Startups will be challenged in the coming months, and potential years, to close early stage funding rounds like they have been during the frenzy of Post-Covid investment. Valuations on these rounds will likely drop and investment may dry up altogether as there are more fish looking for an already diminished supply of food. Though the outlook may look bleak, it is exactly at this point where we expect entrepreneurs to get tough, buckle down, and get building. As always, those who make it through this rough patch will focus on the value of their products, ensure the fit of their offerings, and ultimately listen to their customers. Our intention in this article was to emphasize the significant growth in resources available to early stage companies. We continue to encourage entrepreneurs and investors alike to find and fund these accelerator opportunities to seed the companies with the best chance to weather the storm.